Overview of The obscure pool of money the US used to bail out Argentina
This Planet Money episode (NPR) explains how the U.S. Treasury quietly used the Exchange Stabilization Fund (ESF) — a nearly 90-year-old, discretionary “slush fund” — to offer a $20 billion credit line and buy pesos to support Argentina in 2025. The episode traces the ESF’s origins, compares the Argentina move to the ESF-backed Mexico rescue in 1995, evaluates the Argentina intervention against classic lender‑of‑last‑resort rules, and highlights political and financial risks.
What the Exchange Stabilization Fund (ESF) is and why it exists
- Origins: Created in the 1930s to stabilize the dollar’s exchange rate (originally tied to gold) after FDR’s monetary changes.
- Purpose today: A Treasury-managed pool used to intervene in foreign-exchange markets and respond quickly in emergencies — “break glass in case of emergency.”
- Legal/political note: The Treasury can use it without congressional approval, which allows fast action but raises transparency and oversight questions.
- Size and composition (as described in the episode): Much of the ESF’s assets are Special Drawing Rights (SDRs) with limited usability; around $40 billion in liquid, convertible currency/assets is available — so a $20B commitment is a large slice.
The immediate event: the Argentina move (2025)
- What happened: Treasury Secretary Scott Bessent announced that the U.S. had started buying Argentine pesos and offered a $20 billion swap/credit line to Argentina.
- Purpose stated: Support an allied government in Latin America and stabilize Argentina’s finances ahead of a major election.
- Actions taken: Treasury reportedly bought over $1 billion in pesos on the market and made available the $20B credit line.
- Context on Argentina:
- President Javier Milei (transcript uses variants of his name) has enacted aggressive spending cuts — balanced budget for the first time in 14 years.
- Inflation fell from ~300% to ~30% annually.
- Argentina has a history of default (about nine sovereign defaults historically) and currently owes the IMF over $50 billion.
- Argentina was using dollar reserves to prop up the peso; it also faces a sizable current-account deficit and large near-term dollar obligations.
The historical comparison: Mexico 1995
- Similarities to Argentina: Mexico was propping up the peso with dollar reserves, faced a sudden loss of confidence, and had big dollar obligations — risked a rapid, destabilizing collapse.
- What Treasury did then: Used the ESF to provide a $20B loan (combined with IMF and other contributions >$50B), structured under Walter Bagehot’s guidance: “lend freely, at a penalty rate, against good collateral.”
- Terms and safeguards in 1995:
- Lend freely (more than needed) to restore confidence.
- Charge a penalty/higher rate to discourage misuse and speed repayment.
- Take strong collateral (e.g., claims on Mexican oil export revenues).
- Outcome: The program worked, markets stabilized, Mexico repaid the loan, and Treasury ultimately made a modest profit (~$0.5B). The rescue is often seen as a model for a successful ESF-mediated bailout.
Evaluating the Argentina deal using Bagehot’s rules
The episode uses the same three rules (lend freely, penalty rate, good collateral) to grade the Argentina intervention:
- Lend freely
- Assessment: Mixed/B+ — $20B helps but may only cover a year or less; experts suggested ~$40B might be the more robust amount to fully stabilize things.
- Positive: Treasury also bought pesos directly (extra support).
- Penalty rate
- Assessment: Incomplete — Treasury has not publicly disclosed the loan terms or interest rate; unclear whether the deal uses a penalty rate to limit moral hazard.
- Good collateral (and conditionality)
- Assessment: C — No public evidence of strong collateral or additional policy conditions beyond existing IMF constraints. Much of the ESF support appears unconditional beyond the IMF program.
- Concern: Argentina has not rebuilt foreign exchange reserves to pre-electoral targets; if it continues propping up the peso, the ESF funds could be committed for a long time.
Risks, political motives, and implications
- Political timing: The announcement came ahead of an important Argentine election and is viewed as support for President Javier Milei, who is politically allied with the U.S. administration in the episode’s framing.
- Moral hazard: Unconditional support can reduce incentives for the borrowing country to adopt needed reforms (e.g., letting the currency float).
- ESF depletion risk: Committing most of the ESF’s liquid reserves to Argentina could leave the U.S. unable to respond to other crises.
- Lack of transparency: No published loan terms make it hard to judge safeguards, repayment likelihood, or whether U.S. taxpayers are meaningfully protected.
- Contagion rationale: Just as with Mexico in 1995, stabilizing Argentina is argued as protecting U.S. economic and geopolitical interests and preventing regional contagion.
Key takeaways
- The ESF is a long-standing Treasury tool that allows rapid, unilateral foreign-exchange intervention without Congress.
- Using the ESF to back a $20B Argentina line mirrors the 1995 Mexico intervention in scale but differs in much less publicly visible conditionality and collateral.
- Success depends on Argentina completing the “other half” of reforms — notably stopping reserve drains and allowing the peso to adjust — and on clear, enforceable loan terms.
- Major unknowns: loan pricing, collateral, and whether Argentina will rebuild reserves or continue costly currency defense.
- Watch for: official release of terms from Treasury, Argentina’s reserve trajectory, whether the peso is allowed to float, and election outcomes.
Notable quotes and points
- Bagehot’s dictum (as applied): “Lend freely, at a penalty rate, against good collateral.”
- Treasury as “break glass in case of emergency” — the ESF is deliberately set up for that role.
- 1995 Mexico case ended with repayment and a small profit for Treasury — a successful precedent, but success required strong terms and conditionality.
What to watch next (practical indicators)
- Treasury disclosure of loan terms and collateral or guarantees.
- Argentina’s foreign-exchange reserves and whether they rebuild to targeted levels.
- Whether Argentina changes policy to stop defending the peso (i.e., allows devaluation/float).
- IMF program compliance and any additional conditionality attached to international assistance.
- Argentine election results and Milei’s policy stance post‑election.
Provenance: summary based on the NPR Planet Money episode “The obscure pool of money the US used to bail out Argentina.”